Policies under which a Group company assumes a significant insurance risk from another party (the policyholder) as a result of a provision whereby the policyholder receives compensation if a specified uncertain future event (the insured event) adversely affects the policyholder are treated as insurance policies as defined in the IFRS. A distinction is made between insurance risk and financial risk. Financial risk is the risk of a possible future change in specific interest rates, securities prices, price indices, interest rate indices, credit ratings, or credit indices, or another variable, provided that, in the case of a non-financial variable, the variable is not specific to one counterparty. In many cases, particularly in the life insurance area, insurance policies as defined in the IFRS also transfer financial risk.
Policies under which only an insignificant insurance risk is transferred from the policyholder to the Group company are treated as financial instruments (“financial insurance policies”) for IFRS reporting purposes. Such policies exist only to a minor extent in the personal insurance segment.
Both insurance policies and financial insurance policies may include contractual terms that qualify as profit-dependent net income participation (“profit participation”, “performance-based premium refund”). Contractual rights under which, in addition to guaranteed benefits, the policyholder also receives additional payments which will probably represent a significant portion of the total contractual payments, and are contractually based on:
- the profit from a certain portfolio of policies or a certain type of policy, or
- the realised and/or unrealised investment income from a certain portfolio of assets held by the insurance company, or
- the profit or loss of the company, the investment fund, or business unit (e.g. balance sheet unit), holding the policy
are considered to be profit-dependent net income participation.
Policies with profit-dependent net income participation exist in all markets in the Vienna Insurance Group, primarily in the life insurance segment, and to a secondary extent also in the pro
perty/casualty and health insurance segments, and are treated as insurance policies in accordance with IFRS 4. Net income participation in the life insurance segment exists essentially in the form of participation in the adjusted net income of the balance sheet unit in question calculated according to national accounting requirements. Net income or profit participation amounts that have already been allocated or committed to policyholders are reported in the mathematical reserve.Amounts reported in the local annual financial statements which have been committed or allocated to policyholders by means of net income participation are reported on the balance sheet in the provision for profit-dependent premium refunds. In addition the profit-dependent portion resulting from application of IFRS versus local valuation requirements (“deferred profit participation”) is reported in the provision for profit-dependent premium refunds. The rate used in Austria for calculating deferred profit participation is approx. 80% of the difference between the value recognised in the local financial statements and the value recognised in the IFRS financial statements.
As permitted by IFRS 4, use is made of the option to present unrealised gains and losses with the same effects on balance sheet valuation of underwriting provisions, capitalised acquisition costs and acquired insurance portfolios as realised gains and losses. Consequently, net unrealised gains result in a “provision for deferred profit participation” in the Group company in question. Net unrealised losses are offset against any existing provision for profit-dependent premium refunds, with any remaining asset balance being reported as “deferred policyholder profit participation resulting from valuation differences”. This deferred item is only recognised if it is highly probable, at the Group company level, that the item can be offset by future profits in which the policyholders participate.
Due to the current financial market crisis, negative valuation differences in the fixed-income securities area have resulted in asset-side items being reported at three Group companies for deferred policyholder profit participation resulting from valuation differences. Since the intention is to hold the securities in question for the long term, it can be assumed that these negative valuation differences will be offset in the future by increases in value. The Group companies in question have adequate underwriting provisions when this asset item is taken into account (see Note 12, “”).
Recognition and accounting methods for insurance policies
Vienna Insurance Group fully applies the rules of IFRS 4 relating to the valuation of insurance policies. Accordingly, the values recognised in the consolidated financial statements prepared in accordance with applicable national law are carried over to the IFRS consolidated financial statements. Equalisation and catastrophe provisions are not recognised. No changes were made in accounting rules as compared to the various national accounting requirements. In individual cases, the provisions formed locally by an insurance company for outstanding insurance claims are increased in the consolidated financial statements based on appropriate analysis.
The provisions of IFRS 4.31 were applied for the initial consolidation of the s Versicherung Group. The Vienna Insurance Group made use of the disclosure option in the life insurance segment when preparing the opening balance sheet, and recognised the underwriting provision at fair value, as provided for in IFRS 3. Since underwriting provisions are not calculated prospectively in the casualty insurance segment, the fair value of existing policies is recognised as an asset.
Detailed information on the valuation of underwriting items is available in the remarks for each item.
Adequacy test for liabilities arising from insurance policies
Liabilities from insurance policies and financial insurance policies are tested at each reporting date for adequacy of the insurance liabilities recognised in the financial statements. Up-to-date estimates of the various valuation parameters are examined, taking into account all future cash flows associated with the insurance policies, to determine whether the recognised liabilities are adequate. If these tests determine that the book value of the insurance liabilities is negative, taking into account capitalised acquisition costs and/or capitalised policy portfolio values, the entire shortfall is immediately recognised in profit or loss.